2 tax credits just for small businesses may reduce your 2017 and 2018 tax bills

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Tax credits reduce tax liability dollar-for-dollar, potentially making them more valuable than deductions, which reduce only the amount of income subject to tax. Maximizing available credits is especially important now that the Tax Cuts and Jobs Act has reduced or eliminated some tax breaks for businesses. Two still-available tax credits are especially for small businesses that provide certain employee benefits.

1. Credit for paying health care coverage premiums

The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. Despite various congressional attempts to repeal the ACA in 2017, nearly all of its provisions remain intact, including this potentially valuable tax credit.

The maximum credit is 50% of group health coverage premiums paid by the employer, if it contributes at least 50% of the total premium or of a benchmark premium. For 2017, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $26,200 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,400.

The credit can be claimed for only two years, and they must be consecutive. (Credits claimed before 2014 don’t count, however.) If you meet the eligibility requirements but have been waiting to claim the credit until a future year when you think it might provide more savings, claiming the credit for 2017 may be a good idea. Why? It’s possible the credit will go away in the future if lawmakers in Washington continue to try to repeal or replace the ACA.

At this point, most likely any ACA repeal or replacement wouldn’t go into effect until 2019 (or possibly later). So if you claim the credit for 2017, you may also be able to claim it on your 2018 return next year (provided you again meet the eligibility requirements). That way, you could take full advantage of the credit while it’s available.

2. Credit for starting a retirement plan

Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified start-up costs.

Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.

If you didn’t create a retirement plan in 2017, you might still have time to do so. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions. If you’d like to set up a different type of plan, consider doing so for 2018 so you can potentially take advantage of the retirement plan credit (and other tax benefits) when you file your 2018 return next year.

Determining eligibility

Keep in mind that additional rules and limits apply to these tax credits. We’d be happy to help you determine whether you’re eligible for these or other credits on your 2017 return and also plan for credits you might be able to claim on your 2018 return if you take appropriate actions this year.

Remind soon-to-be retirees about RMDs

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Do you have employees in their late 60s? If so, are they aware of the required minimum distribution (RMD) obligations beginning at age 70½ for their IRAs and possibly their 401(k) plans? It’s essential that they know what to expect when they reach that age so they can avoid a potentially whopping penalty. As their employer, you can stand to benefit from helping them out with a friendly reminder.

IRAs vs. 401(k)s

In most instances, IRA account holders must take RMDs on reaching age 70½. However, the first payment can be delayed until April 1 of the year following the year in which the individual turns 70½. (For inherited IRAs, RMDs are often required earlier.)

401(k) accounts are a different story. Account holders don’t have to begin taking distributions from their 401(k)s if they’re still working for the employer sponsoring the plan. Although the regulations don’t state how many hours employees need to work to postpone 401(k) RMDs, they must be doing legitimate work and receiving wages reported on a W-2 form.

There’s a notable exception, however: Workers who own at least 5% of the company must begin taking RMDs from the 401(k) starting at 70½, regardless of their work status.

If someone has multiple IRAs, it doesn’t matter which one he or she takes RMDs from so long as the total amount reflects their aggregate IRA assets. In contrast, RMDs based on 401(k) plan assets must be explicitly taken from the 401(k) plan account.

Other pertinent facts

Here are some additional RMD facts you can share with employees approaching retirement:

Calculation of RMD. The IRS determines how RMD amounts change as the account holder ages, using a formula and life expectancy tables. For example, at age 72, the IRS “distribution period” is 26.5, meaning that the IRS assumes that the individual will live another 26½ years. Thus, he or she must withdraw the percentage of the IRA or 401(k) account that is 1 divided by 26.5 (3.77%).

Beneficiary spouses. Account holders who have a beneficiary spouse at least ten years younger are subject to a different RMD formula that allows them to take out smaller amounts to preserve retirement assets for the younger spouse.

Tax penalty. The penalty for withdrawing less than the RMD amount is 50% of the portion that should have been withdrawn but wasn’t.

Form of distribution. RMDs can be in cash or be taken in stock shares whose value is the same as the RMD amount. Although this can be administratively burdensome for you as the employer, it allows your employees to defer incurring brokerage commissions on securities they don’t want to sell.

Informed employees

Remember, informed employees are happy employees. Educating your older employees about their RMD obligations can help maintain healthy morale among these employees and demonstrate to your entire workforce (and job candidates) that you care about retirement planning. Let us know how we can help with this critical effort.

Repatriating income to the U.S. has benefits.

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The Tax Cuts and Jobs Act (TCJA) imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. Certain corporations must now increase their subpart F income by the amount of their deferred foreign income. Code Sec. 965, enacted as part of the TCJA, contains a loophole that allows taxpayers to convert such income so it becomes taxable at 8% (instead of the original 15.5%). This applies to the last tax year that began before Jan. 1, 2018.

Don’t be a victim of tax identity theft: File your 2017 return early

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The IRS has just announced that it will begin accepting 2017 income tax returns on January 29. You may be more concerned about the April 17 filing deadline, or even the extended deadline of October 15(if you file for an extension by April 17). After all, why go through the hassle of filing your return earlier than you have to?

But it can be a good idea to file as close to January 29 as possible: Doing so helps protect you from tax identity theft.

All-too-common scam

Here’s why early filing helps: In an all-too-common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

The IRS is working with the tax industry and states to improve safeguards to protect taxpayers from tax identity theft. But filing early may be your best defense.

W-2s and 1099s

Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2017 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2017 interest, dividend or reportable miscellaneous income payments.

If you don’t receive a W-2 or 1099, first contact the entity that should have issued it. If by mid-February you still haven’t received it, you can contact the IRS for help.

Earlier refunds

Of course, if you’ll be getting a refund, another good thing about filing early is that you’ll get your refund sooner. The IRS expects over 90% of refunds to be issued within 21 days.

E-filing and requesting a direct deposit refund generally will result in a quicker refund and also can be more secure. If you have questions about tax identity theft or would like help filing your 2017 return early, please contact us.